Lease Relief During COVID-19: What to Consider When Seeking a Break in Rent

Operators seeking a reprieve from monthly rent payments amid this crisis have options but may need to tread carefully. David Denney, principal of the Denney Law Group, a nationally recognized restaurant and bar legal practice, has been busy guiding clients through this process. He shared advice and caveats.

As independent restaurateurs struggle to survive the COVID-19 pandemic, one of their first orders of business is to reduce ongoing costs of business, including direct costs (such as labor and inventory), and overhead. For the many independent operators who lease their space, rent is the most burdensome ongoing cost.

The good news, according to Denney, is many operators have successfully negotiated rent abatement terms with their landlords. Rent abatement in a commercial lease means that the tenant does not have to pay rent for a certain time period for a host of reasons. In the case of COVID-19, the reason is obvious: a sudden and unexpected cessation of business.

Denney recommends operators contact their landlords as soon as possible and negotiate a 90- to 120-day abatement. He cautions operators not to be surprised if their landlord seeks an amendment in the lease agreement to add the unpaid rent periods to the end of the lease period. For example, if the landlord agrees to rent abatement for 120 days (four months) on a 10-year lease (120 months), it would extend the term of the lease to 124 months of payments.

The exact terms of the abatement might depend on the generosity of the landlord. For example, the terms might be simply rent abatement, but not other obligations under the lease. If you are a restaurant tenant, you likely know leases for commercial property are typically "triple net"; in other words, lease agreement on a property where the tenant agrees to pay all real estate taxes, building insurance, and maintenance (the three "nets") on the property in addition to any normal fees that are expected under the agreement (rent, utilities, etc.).

You might want to negotiate abatement from certain obligations (e.g. maintenance expenses). If you have been a longstanding and good tenant with steady business, it is more likely your landlord will want to give you every opportunity to survive. No landlord wants a vacancy, particularly in this environment. And if your guests are still visiting your restaurant for take-out service, they are still patronizing that location.

The abatement language is separate from the lease agreement and need to be in writing. For the purposes of evidence and enforcement of the terms, copies of an email exchange are sufficient. The language does not have to be elaborate. It just must clearly state the terms of the agreement on its face, without having to resort to other language to be interpreted.

Force Majeure

If you've been following the restaurant trade media, your attention might be called to the "force majeure clause", typically boilerplate language included in contracts -- including lease agreements -- to remove liability for natural and unavoidable catastrophes that interrupt the expected course of events and restrict participants from fulfilling obligations, such as "an act of God, governmental control or other factors beyond the reasonable control of the parties". You would find this language, if it exists in your lease agreement, near the end of the contract, along with other boilerplate terms.

A typical force majeure clause in a modern lease agreement might read:

FORCE MAJEURE CLAUSE. Wherever there is provided in this Lease a time limitation for performance by Landlord or Tenant of any obligation, including but not limited to obligations related to construction, repair, maintenance or service, but excluding any rental obligation of Tenant, the time provided for shall be extended for as long as and to the extent that delay in compliance with such limitation is due to an act of God, governmental control or other factors beyond the reasonable control of such party.

As you will note, this clause relieves both the tenant and landlord for obligations, excluding any rental obligation of the tenant. According to Denney, however, older agreements might be silent regarding tenant rental obligation exclusions. In that case, you may argue COVID-19 falls under force majeure events as basis for avoiding rent obligations during this crisis. Nevertheless, you would be best-advised to negotiate terms in good faith with your landlord rather than dangling this language, unless your landlord takes a hardline position. Denney has found landlords to be forgiving under the circumstances in many but not all cases. If you have to play proverbial hardball with your landlord, you are advised to hire a lawyer for the tough talk.

Bankruptcy and Your Lease

While no one wants to talk about bankruptcy, it is likely on the minds of many operators. Chapter 11 bankruptcy (named after the U.S. bankruptcy code 11) allows a debtor corporation or limited liability company a stay- from creditors, including landlords, to reorganize its business affairs, debts, and assets. Before you file bankruptcy, you need to speak to an attorney that specializes in this area of law. Leases often have a provision that if the tenant files bankruptcy it constitutes default, and essentially invalidate the agreement. Also, if you used any of your commercial or personal assets as collateral when you took out an SBA or bank loan, your lender can still enforce its lien even if you file for bankruptcy relief.

Once More with Feeling: We're in this Together

As we become aware of other legal issues related to surviving COVID-19, we will attempt to provide sound general advice. Please note this article is only for general information. You should confer with legal counsel for advice specific to your business. We have some of the best restaurant industry legal advisors in the country ready to help us keep you informed on key matters.

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